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A group of US investors, led by Clayton, Dubilier & Rice (CD&R) and backed by Cisco Systems, have agreed to buy 80 per cent of the share capital of Telecom Italia's networking unit Italtel SpA for 800 million euros ($1.2 billion), the companies have announced.

Cisco and Telecom Italia have also agreed to form a strategic alliance to promote the use of Internet applications, the two companies said.

CD&R, a private investment company based in New York, will make a capital payment of approximately 285 million euros for around 50.1 per cent of Italtel's share capital, the companies said in a prepared statement.

Cisco will take a 19 per cent stake in Italtel, a company specialising in the production and installation of switching equipment, while US investment companies Brera Capital and Advent International will acquire approximately 11 per cent, the statement said. Telecom Italia will retain a 19 per cent stake.

Italtel's telecommunications systems are installed in more than 20 countries, including Spain, Russia, Argentina and Chile, according to Telecom Italia's annual report.

"Cisco's experience in the Internet economy and in network hardware, together with Italtel's know-how in voice/data integration, ensures the necessary resources to exploit the enormous commercial opportunities that are," William Nuti, Cisco's president for Europe, Middle East and Africa, said in a prepared statement.

Italtel is currently the principal supplier of digital switching equipment and software to Telecom Italia, which will remain one of its main clients. Telecom Italia will have no operational role in the management of Italtel. The deal is subject to the approval of Italian and European Union regulatory authorities, and the operation is due to be concluded by the end of September, the companies said.

The alliance between Cisco and the former Italian national carrier is intended to offer innovative data, voice and video services to business and residential clients by integrating Telecom Italia's advanced DSL (Digital Subscriber Line) and wireless technologies with Cisco's experience in the networking field, the companies said in a separate statement.

The two companies will collaborate on the integration of voice and data on IP to serve both business and residential customers, according to the companies. "Developments will include the use of broadband access (DSL), the use of voice switching based on IP and the development of fibre optic networks for future network architectures," the statement said.

"This alliance will have a major impact, not just in Italy but also in Europe, where both companies operate," Stefano Venturi, CEO of Cisco Systems Italy, said in a prepared statement.

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